1
Effective Date: October 15, 2004
COORDINATED ISSUE
ALL INDUSTRIES
TRANSFER OR SALE OF COMPENSATORY OPTIONS OR RESTRICTED STOCK
TO RELATED PERSONS
UIL: 9300.28-00
FACTS:
The transaction generally involves three parties: (1) an individual who holds
nonstatutory stock options (the executive); (2) the corporation that granted the options;
and (3) a person or entity related to the individual, such as a family limited partnership
(the related person). The related person purports to purchase the options from the
executive in exchange for an unfunded, unsecured long-term balloon payment
obligation in an amount equal to the fair market value of the options. The related
person may then exercise the options but does not make any payments to the executive
(except perhaps interest on the obligation) until the balloon payment comes due.
The parties generally contend that the purpose of the related person is to aggregate and
diversify assets. Often the executive retains the vast majority of the ownership of the
related person (for example, up to a 99% limited partnership interest), or may be a
general partner in, or manager of, the related person. Generally, the related person is
thinly capitalized at the time of the transfer, funded only by the executive’s initial
contribution of personal stock holdings or cash.
This transaction typically involves the transfer of stock options. However, variations
may include transfers of restricted stock or a combination of stock options and restricted
stock. The related person receiving the options typically is a limited partnership, all of
the members of which consist of the executive and members of his or her immediate
family. Other related persons may include a limited liability corporation or a foreign or
domestic trust. Usually, the executive transferring the option is a corporate officer and
employee. However, individuals transferring options or restricted stock have included
non-employee directors.
The executive transfers the